Question

Explain the stagflation of the 1970s. ( I want the answer computer typing NOT handwriting)

Answer 1

Stagflation is a situation where both inflation rate and unemployment rate are high,and economic growth is low. Few factors that led to stagflation of 1970s are-

i) Fed believed there is an inverse relationship between inflation rate and unemployment rate;Philips Curve. Hence, it increased money supply to boost demand,which increased price level. However, wage-price spiral followed. That is,expecting a higher price level workers demanded a higher wage,which in turn raised the prices even further. The production did not increase, the demand however did not increase,but inflation did.

ii) Oil Embargo-OPEC announced higher prices for oil. Oil was an input for many industries and fuel,hence hike in its price affected the economy hard.